Goldman Sachs Group Chairman and Chief Executive Officer Lloyd C. Blankfein on Tuesday called for compensation reform for Wall Street firms and criticized the industry for relying too heavily on ratings agencies.

Mr. Blankfein, speaking at a meeting of the Council of Institutional Investors, said that compensation should discourage excessive risk-taking that could put companies and the markets at risk.

"We should apply basic standards to how we compensate people in our industry," he said.

His remarks were interrupted by protesters who walked up to the podium and unveiled a sign which read, "We want our [money] back."

Mr. Blankfein said he understands why the public is angry about compensation at financial firms—particularly at companies that received government bailout funds.

Controversy over compensation exploded last month when came to light that American International Group paid out $165m (€124.2m) in bonuses to the employees in the same division that took such excessive risks the government was forced to rescue the ailing insurance giant.

Last year, Goldman Sachs received a capital injection of $10bn, which Mr. Blankfein said is why the company decided the executive management team should forgo bonuses in 2008.

Mr. Blankfein said a "systemic lack of skepticism" led the industry to be caught off guard by the rapid decline in value of investments such as mortgage-backed securities and collateralized debt obligations.

"Too many financial institutions and investors simply outsourced their risk management," Mr. Blankfein. "Rather than undertake their own analysis, they relied on the rating agencies to do the essential work of risk analysis for them."

Mr. Blankfein suggested that banks and other financial companies must clearly define the role of risk managers. Companies' risk managers need to have equal stature "with their counterparts in revenue producing divisions."

"If there is a question about a mark or a disagreement about a risk limit, the risk manager's view should prevail," he said.

Mr. Blankfein also expressed some support for a systemic-risk regulator at the center of the US Treasury's current plans for financial regulatory reform.

"For policymakers and regulators, it should be clear that self-regulation has its limits," he said, adding that all pools of capital that may prove burdensome to the marketplace in a time of crisis should be included in the regulatory scheme.

"Yes, that includes large hedge funds and private equity funds," he said.

He also addressed the problems that arose before and during the crisis on how firms measured risks in off-balance sheet activities and how they valued their assets, saying he advocates fair value accounting standards.

"I've heard some argue that fair value accounting—which assigns current values to financial assets and liabilities—is one of the major reasons for exacerbating the credit crisis. I see it differently. If more institutions had properly valued their positions and commitments at the outset, they would have been in a much better position to reduce their exposures," he said.